A case study on Ethical Business Practices : Polyhydron Pvt ltd

This Also Happens in India!

Walking through the Business Ashrama of his company after everybody else had left,
Suresh B. Hundre, Chairman and Managing Director of Polyhydron Private Limited
(PPL), felt pride on what had been achieved to date and especially on how it had been
achieved. The company has grown to Rs. 42 crores in annual revenues in 2005-06
(compound annual growth rate > 30%) since it was founded in 1981, and was known all
over India for its innovative management and manufacturing systems and
exceptionally high ethical standards towards all its stakeholders. In spite of being
located in the small Indian town of Belgaum in Karnataka close to the border with
Maharashtra, India the company had successfully adapted and implemented its own
versions of Just-In-Time (JIT) production, the Kanban Card System, Kaizen, Enterprise
Resource Planning and other innovative management practices. Hundre also reflected
on the overwhelmingly important role that ethical behavior and a strong resistance to
corruption had played in the company's growth and success.

Hydrotechnic – The Begining

Suresh B. Hundre, the son of a shop-keeper, graduated in engineering from the

Regional Engineering College at Suratkal, and worked afterwards as an assembly &
testing assistant in a hydraulic manufacturing company for 15 months until the end of
March in 1974. Though Bombay seemed to be the most promising place to pursue his
career, he finally decided against doing so and persuaded two of his colleagues to
become entrepreneurs and start a company with him in Belgaum. All three - Hundre
himself, D. S. Chitnis, and V. K. Samant - finally got together and started Hydrotechnic
in April 1974. The initial investment was Rs. 5,000 from each plus a Rs. 25,000 loan
from the bank and with that they started a hydraulic tube fitting and related equipment
manufacturing unit in a building previously used for producing soap. Their strategy was
successful, though business was tough in the first few years, and by 1981 they had
reached Rs.1.4 lakhs in annual revenues.

Polyhydron - Growth

Then in 1981 the three partners started another company - Polyhydron. Little could
they imagine the turbulent oceans they would need to navigate before turning
Polyhydron into a role model for companies allover India.
The initial idea to start another company came from an external consultant, who
suggested that Hydrotechnic sub-contract parts of its work to a new company to reduce
its tax liability. Following this advice all three started a second company - Polyhydron -
in the names of their wives and drafted a partnership deed. This second company had a
start-up capital of Rs. 4,200, i.e., Rs. 1,400 per partner.

The Journey from ‘Business as Usual’ to Ethical Business

Two years later - 1983 - events took place, which changed forever the way Polyhydron
did business. One of their consultants advised them to manipulate the balance sheet to
prevent paying taxes on their considerable profits. The way to do so was to buy a big
machine before the end of the financial year. Although they had plenty of cash, the
machine was not available and could not be supplied before the end of the financial
year. Nevertheless, a deal was closed with the supplier and Polyhydron received the bill
as well as the lorry receipt. Accordingly, they accounted for the machine; claimed
depreciation & reduced their tax payment. Before the machine arrived, the income tax
department came to know about this deal and started an enquiry.

While the machine supplier ‘managed’ to get out of trouble, Polyhydron got caught and
the income tax officer filed a case that due to the ownership structure of the company
got directed to their wives. Now the wives, through no fault of their own, had to go to
court, explain what happened in the witness stand and go through the whole legal
procedures.

Hundre referred to this situation in 1984 as the turning point in his approach to
business, saying: "Then I realized it is not worth it - for what are we doing this? It is not
worth it at all. I told my partners that we will stop it and make sure to never let this
happen again."

While Hundre had decided that his company will never again get involved in unethical
practices, the business environment he operated in did not change and naturally
conflicts were just a question of time.

Immediately after the tax evasion case, Polyhydron started paying its taxes meticulously
and changing old business practices with clients and other stakeholders. While in earlier
times they used to sell materials without bills, they stopped this practice and started
accounting every transaction. With this, dealing in black money was brought to a stop.

In 1989 Hundre changed Polyhydron from a partnership company into a 'Private

Limited' company.
Shortly thereafter, a factory inspector came for a first visit. Out of fear that he might
submit a negative evaluation of the company, Hundre eventually paid him Rs. 100 and
the inspector was happy and 'went away’. Though it was very easy to deal with officials
in such a way, it made Hundre feel very uncomfortable, left a very bad impression on
his mind and pinched his conscience. After this incident, Hundre decided that no more
bribes were going to be paid - but he realized also that this is only possible if things are
done in accordance with the rules. The basis for this is to know and understand the
legislation. Hundre described his attitude as follows: "If I do not know some law, how
can I be right? I may be wrong also, but that doesn't matter - whatever I know I should
be able to manage as per the requirement and I came to the conclusion that if you are
sixty per cent right, nobody can touch you, because the government officers are
not knowledgeable of even fifty percent of the law. This was the thumb rule I made
to myself and I told my managers that whatever happens they must maintain this - there
is no alternative and we are not going to bribe anybody from now on." This decision was
a first step on a long and difficult road to become the company which is nowadays
known allover India for its resistance to corruption.

This fundamental decision met its first challenge on the next occasion when a
government representative came and said he was supposed to audit PPL's accounts,
but did not have the time to do it, and was willing to leave if he was paid some money -
for himself as well as for his two assistants. It went even so far that he told Kulkarni - a
manager of PPL - how to bundle and pack the money. Kulkarni, following the new policy
of the company, told the officer that the company had adopted a policy of not paying
bribes. The government officer asked for Hundre and proposed him a nil report
(meaning that no money was due from Polyhydron to the tax authorities) in exchange
for three hundred rupees. Hundre asked him instead for a real report, since he was not
interested in a nil report.

The government official responded that he had to work for that and Hundre responded:
"It is your decision whether to work or not to work but I am interested in a real report.
Whether I am doing things right or wrong, you have to tell me because it is your job. I
want to know if I am making mistakes, because I would rather correct them today than
do it after some years to prevent my liability from increasing."

The officer asked for the books and started searching for mistakes - after he found the
first couple he told Hundre angrily that he shouldn't have asked for a real report and that
he was going to be penalized now. Hundre just responded: "No problem, please put it
on a piece of paper and tell me in writing," because one of the principles he had
adopted was that he would never accept any decision or instruction from any
government officer as long as it was not written down and authenticated by him. Hundre
explained this requirement: "What I have learnt over a period of time is that most
government officers would like to talk and threaten you orally, but they never put it on a
piece of paper unless they are confident that they are not going to get any money out of
it. I was not ready to pay any money, so the alternative was for him to put it on a piece
of paper."

About the mistakes, Hundre told the officer, "Yes, I won't disagree with you. I have
made two mistakes which you have pointed out. I promise you right now, I will correct
the system from today onwards and for the past I am ready to pay the penalty, but you
have to give it to me in writing - that is the only requirement. Please calculate and tell
me the liability and I am ready to pay."

After the government official realized that he was not going to get any money from
Hundre, he just closed the book and went away. Hundre's growing courage was also
shown in another incident, when a labour inspector came to visit the company. After he
saw everything, he finally said that a certain "Form 31" was not displayed on the notice
board. When Kulkarni then put it on the notice board the inspector said that it was too
late and that they would have to pay for the offence. Hundre just answered: "It doesn't
matter. I am ready to pay the penalty if there is a punishment. I am ready to go to jail
also - no problem, don't worry about it. If you want me to come along with you please
give me one hour, I will go and get a bag - we will go together and you can put me in
jail, no problem."

The labour inspector abruptly took the notice away, tore it into pieces and went away.

Following this, Hundre asked the labour inspector how he had come to his company,
and the latter answered that he had come on his two-wheeler. On Hundre's inquiry if he
had brought a helmet and his driver's license, the inspector showed his helmet, but said
that he did not bring his license, in case he lost it. Hundre responded that it was against
the law to drive on the road without carrying the original license and added:

"Now you have committed an offence, and you are not going out of my office. I am
going to call the traffic police the moment you start your vehicle and go on the road. I
will ask him to catch you because you are not carrying your license. How do you like
that?!"

One incident that Hundre described as his most difficult occurred when Oil Gear Towler
Polyhydron (the third company headed by Samant) had already constructed a building
and applied for power supply. By then, Hundre was already known in the region for not
paying any bribes. There was then a government officer (Assistant Executive Engineer)
of the Karnataka State Electricity Board (KSEB) who used to harass everybody and was
very corrupt. He knew that Hundre did not pay bribes and so he decided to challenge
him and not to supply power to the new unit unless he paid bribes. This KSEB officer
stated his position explicitly to Hundre's contractor. Hundre accepted the challenge and
responded that he would obtain power supply without paying any bribe.
Hundre immediately started to mobilize public opinion and organized a very big agitation
he even went twice to the Chief Minister, which seemed to solve the problem at first,
because instructions were sent to the Chairman of the KSEB to suspend the corrupt
officer. Since the Chairman was also corrupt, he told Hundre that the Assistant
Executive Engineer was a good man and that Hundre was misinformed. Beside, the
official letter of the Chief Minister never reached the Chairman since the corrupt officer
managed to intercept it and even showed it to Hundre. Hundre went again to the Chief
Minister with the whole story this time he got the letter and delivered it personally to the
Chairman of KSEB. This left the Chairman with no option but to transfer the corrupt
officer, though he did not suspend him.

It was Polyhydron's bad luck that after seven years of absence from Belgaum, the same
officer came back as an Executive Engineer. Hundre was outraged that this officer
could get promoted and even transferred back to a city where so many businessmen
and companies had suffered so much from him. .

This time Hundre approached the Member of Parliament from Belgaum, and told him
that if he did not get the new Executive Engineer out of Belgaum he would start the
agitation again. When he was talking to the MP, Hundre did not realize that the very
officer he was talking about was standing behind him in the same office. The person
who had just become MP had no guts to suspend the corrupt officer and so Hundre left
his office. The Executive Engineer followed Hundre and asked him to forget about the
past and promised not to trouble anybody in the future, Hundre just refused: "Whatever
you may say now, I cannot forget those harassment and the atrocities that you have
indulged in, not only against me, but against all small businesses - I cannot forgive you
and it is an insult to me and to the industrial community that you have come here as an
officer. I am not able to tolerate this but be careful and don't try to harass anybody. The
first instance you do that and if I come to know, I am going to continue my effort to oust
you - no doubt about it. At any cost I want you out."

Some years later - in 2002 - when Hundre needed to convert the power supply for his
company from low tension to high tension and sent an application to the KSEB, and the
application went to the same Executive Engineer. The first application was lost by him
and PPL made a second one. Hundre's contractor went to KSEB office and told Hundre
afterwards that the officer was up to mischief. Hundre was under time pressure and
wanted power within one week, because without it could not start production. He was
not willing to go and meet the officer, but wanted the issue to be resolved quickly, so he
wrote an e-mail with three questions to the Chief Minister.

1) Is it so difficult to get a 50 HP (high tension) electricity supply to run an industry which

contributes so much money to the government? 2) If somebody is responsible for
delaying this power supply, is he held responsible for the loss to the government and
also to industry? 3) If this is the case, can you do something about it?

Hundre sent the questions at 1230 pm and at 5pm the Chief Minister answered that he
understood Hundre' s position, he would look into the matter and would ensure that the
matter was resolved. On the seventh day, Hundre got his high-tension power for PPL
without meeting the government officer.

Hundre described that he often felt that his blood was boiling and that he was fearless in
his battles, determined by the values which he had committed himself to. Some of his
stakeholders admitted that they were even afraid of his temper. He was willing to take
all the consequences for defending his values and was even willing to go to jail for
them. But he also realized that it was a very difficult way of doing things and that he
could not force everybody to adopt his approach. "I restrict this way of fighting to myself.
It is very difficult to change the world - impossible - but at least I try to set an example
and show people that you can be honest, ethical and do business profitably."

Credit policies
PPL made a commitment that it would fund growth from reinvested profits, and this
meant that it followed a no-debt policy. For more than ten years, PPL had been a zero
interest company and even financed the Rs. 60 lakh building at Machhe without any
loans. Furthermore, the company paid suppliers immediately upon delivery. At the
same time, PPL did not give any trade credit to any customer. With these policies,
Hundre had turned PPL into a cash-rich company. Hundre explained that he was "not in
banking, but in the manufacturing business".

Tax
PPL ensured total transparency regarding tax matters and all of the company's
accounts. Hundre incorporated various systems with regard to honesty and he did
not hesitate to pay tax - he even felt pride on being a contributor to the national
exchequer. Tax accountants in contact with PPL confirmed that they did not know any
other company who took care of this issue with such accuracy and honesty. This
practice was founded on the company's code of ethics: "Each of our employees is
responsible for both the integrity and consequences of his own action. The highest
standards of honesty, integrity and fairness must be followed by each and every
employee". The company strove to meet all the statutory requirements as an SSI unit
and paid all government dues regularly. The workers fully realised that the management
policy was to treat all these dues (including Renewal fees, Professional tax, ESI, Entry
tax, Sales tax, Central Excise Duty and Income tax) as its contribution to the
Government and to make no effort to dodge liabilities or find loopholes. The employees
knew that even after paying these taxes, the company could still meet its commitments
to its employees.

The company placed great importance on having a close and intensive relationship with
its suppliers - and followed the policy "one supplier for one product". Furthermore,
vendors stated that PPL took care of any technical, non-technical, or personal problem.
For example if there were any training programs for any of the vendors, these training
programs were offered at PPL. Some vendors described their own relationship to PPL
as so close that they considered themselves a part of the Polyhydron Group, although
there was no legal connection between them. There was also no need to follow-up
payments for orders from PPL. "Not even a single phone call is needed for this -
automatically the cheque is posted."

Ethical behavior and the future

If small companies were informed about the practices at PPL, and were asked if they
would adopt them, many responded that they could not because they were too small
and did not have the same influence or resources - and therefore bribing seemed to be
the easier or only way out. Hundre did not accept this as a valid argument:

"The fundamental issue is not understood, because it is not necessary and indeed
practically impossible to follow each and every rule in this country because we really
don't know how many rules are applicable to us. The most important thing is to behave
correctly to the extent possible. Basically, people are morally and mentally weak.
People do not want to fight. They think that they can not fight and they have not realized
that there is a power in everybody. When I started fighting I was not a big man. People
say to me - 'you can talk all sorts of ethical management and spirituality and this and
that because your stomach is full, you have become rich, you have become strong, etc.'
It is not whether your stomach is full or not, it is your mind which says whether your
stomach is full or not. It is the mental status of the human being that matters as far as
money is concerned. It is the mental attitude of the person and not the physical
appearance or financial status. It is your achievement and attitude which tells you
whether you should do this or not."

Hundre believed his non-bribing policy had not taken any business from him, though he
also stated that this was once the case with Oil Gear Towler. They lost business from
the government, because they did not bribe. For him the values are the skeleton of a
company and do not change no matter what the conditions. Much less clear was the
future of PPL from a business point of view.
*** Excerpts from a Case Study by Ramkrishna Velamuri (Spain). Downloaded from the Company’s website